Exam
OUTCOME: BUSINESS OR NOT A BUSINESS?
The doctor had to pay up. The state tax board used the same nine factors as the IRS in evaluating whether the doctor’s activity was engaged in for profit, but was not bound by the IRS’s determination in the doctor’s favor: (1) the manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or any advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer’s history of income or losses with respect to the activity; (7) the amount of occa- sional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) the elements of person- al pleasure or recreation. The state tax board noted that “no single factor or group of factors is determina- tive; rather the ultimate goal of the test is to evaluate the taxpayer’s subjective intent.” In commenting on the “businesslike manner” in which the doctor conducted her activity, the state tax board pointed out that keeping track of expenses was not determinative of a profit motive “when there is a lack of evidence that the taxpayer used the records to improve the performance of a losing operation.” The state tax board found that the doctor’s “tracking of her expenses was not motivated by a desire to ana- lyze and improve profitability, but by [her] personal desire to simply keep track of outflows and to sub- stantiate her tax deductions.” As to the doctor’s “expertise”, the state tax board
found “little indication in the record that [she] made any serious effort to develop expertise in the economics of training, leasing and selling horses as a business. . . [the doctor] failed to present evidence tending to dis- tinguish her consultations [with professionals] from those of an ordinary high-level amateur rider.” The doctor estimated that she spent 25-29 hours
per week on her equine activity, despite her de- manding professional schedule. The state tax board dismissed the importance of her time commitment, finding that the time she spent riding and training the horses and competing with them at shows “would have been performed whether the activity was under- taken primarily for profit or as a hobby. Furthermore, the fact that [the doctor] has owned, trained, and ridden horses her entire life indicates that the activity had ‘substantial personal or recreational aspects’ other than a profit motive. . . although [the doctor] devoted significant time to her horses, because of her keen interest in equestrianism, she would have spent that time regardless of whether she intended to carry on a trade or business.” In evaluating the financial losses of the doctor’s equine activities, the state tax board noted that the
48 May/June 2015
doctor could not demonstrate how she would ever be able to recoup the losses she had sustained through future net earnings. The state tax board considered that even if the doctor had succeeded in selling her best horse for $500,000, as she had hoped she would, her profit would still have been insufficient to offset the operating losses she had incurred up until that point. In considering the final factor, “elements of per- sonal pleasure or recreation,” the state tax board com- mented the following: “Deriving enjoyment from the particular activity at issue may indicate that the tax- payer is not conducting the activity for profit, though the presence of a personal or recreational element is not determinative if a profit motive is evidenced by other factors. ‘Unquestionably, an enterprise is no less a business because the entrepreneur gets satis- faction from his work; however, where the possibility for profit is small and the possibility for gratification is substantial, it is clear that the latter possibility con- stitutes the primary motivation for the activity.’ [The doctor] has been an avid horse rider since her youth. The state tax board found it clear from her testimony that even though keeping horses involves significant effort, [she] received great personal reward, despite the entire lack of monetary reward, from the sport of dressage and from her relationships with her animals. While working grueling hours at [the hospital, the doctor] still made time to train and ride her horses. She testified that she generally had not taken vaca- tion other than to work with those horses. Dedication can be ‘equally demonstrative of a commitment to the horses themselves and an inclination to work with them as it is of a profit making intent.’” The state tax board concluded that the doctor, because of her life-long personal interest in horse riding and training, would have continued her activ- ity regardless of its profitability, and thus ruled that she had not engaged in her equine activity with the required profit objective and was not entitled to de- duct the expenses associated with her activity as a business expense.
About the author: Krysia Carmel Nelson is an at- torney from Virginia who is a nationally-recognized expert in equine law. Attorney Nelson represents horse owners, train- ers, riders, breeders, equestrian facilities, farms, clubs and associa-
tions across all nationally and internationally recognized disciplines. As a lifelong equestrian, she currently rides and competes her Hanoverian Affirmed on Appeal in the amateur hunters. She can be reached at
eqlaw@aol.com.
Bar
© The Book LLC 2011
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68